Reward temporarily declined while I draft a more accurate and complete disclaimer.
I will still be upvoting good comments.
Thanks for your support!
Authored by Lou Kerner via HackerNoon.com,
Everyone's ADD, including me. I get attracted by shiny objects. I first noticed Bitcoin as a shiny object in mid-2013. I went down the rabbit hole far enough for The Wall Street Journal to call me "Wall Street's Bitcoin expert" while they live blogged a Bitcoin conference call I hosted. I invested in ChangeTip. I bought and sold BitcoinWallet.com. Unfortunately, by late-2014, nine months in to a severe Bitcoin price decline, my focus wandered to new shiny objects.
Fast forward to 2017, and my mind wandered to a new shiny object, ICOs. Once again, I got the four smartest people I could find on the topic, and held a conference call on June 29th during which I had my crypto epiphany.
Crypto is now so shiny, so luminous, I can't divert my eyes. I'm living and breathing crypto 24/7. Reading every thoughtful post I can find. Meeting anyone thoughtful on the topic. Holding more crypto conference calls. And writing and writing on crypto, because that's the best way to learn.
After 3 months going down the rabbit hole a second time, here's what I learned...
1. I'm A One Eyed Man In The Land of Other One Eyed People
We're still so early, that much about what people are saying and writing about crypto is more theory than fact. Lots of people (including me) compare the the crypto bubble to the Internet bubble. But the parallels between the development of crypto and the development Internet are everywhere I look. Take this snippet from Wikipedia's "History of the Internet'':
"With so many different network methods, something was needed to unify them. Robert E. Kahn of DARPA and ARPANET recruited Vinton Cerf of Stanford to work with him on the problem. By 1973, they had worked out a fundamental reformulation, where the differences between network protocols were hidden by using a common internetwork protocol….."
As a non-techie, that sounds exactly like a paragraph I read yesterday on Medium. But an important difference about the evolution of crypto and the evolution of the internet is how public crypto's early evolution is. There were maybe a few thousand people who cared about what Cerf was doing in the early days of the Internet. So it was done out of the public's eye. It wasn't until 1994, 21 years after Cerf's 1973 solution, that Netscape introduced it's browser, and most people learned about the internet.
Crypto is evolving in its early days in a public way, so it's messy, and theoretical, and dense. So if you feel like you don't really understand crypto, join the crowd. Neither of us would have understood much if we sat in the room with Vint Cerf in 1973.
Another sign that it's early is that foundational parts of crypto theory like Joel Manegro's Fat Protocol post , which has been repeated ad infinitum, is being questioned and rethought by Teemu Paivinen, Jake Brukhman and others (h/t Yannick Roux).
2. Bitcoin Is A Confidence Game, Utility Tokens Are Awesome But Legally Challenging, Security Tokens Are Going To Be Huge
The chart below provides a simple way to think about the three types of cryptocurrencies.
On the currency side, while Bitcoin is a crypto leader in payments, it's rise in it's value has little to do with the currency applications of Bitcoin, and all to do with it being a store of value. Therefore, Bitcoin is simply a confidence game as are ALL store of values. As with other assets, the higher Bitcoin's value goes, the more confident investors become, which is another factor driving bubbles. After being used as a store of value for thousands of years, it's easier to believe in gold as a store of value (hence the rocks have a total market cap/are storing over $7 trillion in value vs. $75 billion for Bitcoin today). I believe Bitcoin will continue to gain share of value storage. I'm a HODLer.
Utility Tokens like Civic which provide a digital good in return for the token (in Civic's case they provide businesses and individuals the tools to control and protect identities) are an exciting new way to fuel ecosystems. However, in the SAFT White Paper published by Cooley and Protocol Labs last week, a whole section is titled "Pre-functional Utility Token Sales Are More Likely to Pass the Howey Test", which is another way of saying the SEC is likely to deem them a security. Hence they propose the SAFT as an instrument to address this risk.
The third type of token are Security Tokens, which are similar to shares, as they convey ownership interests. The cool thing about Security Tokens is that they're liquid (assuming there's someone who wants to buy them and security laws are addressed), and companies can access a global investor base when raising capital/doing an ICO. While most of the ICOs to date have been Utility Tokens, because of the massive advantages that Security Tokens have over traditional capital raising, I think the total market cap of all security tokens will be much larger than the total market cap of all utility tokens.
3. Blockchain Technology Is Going To Be A Disruptive Force Across Industries
This post in Blockchain Hub gives a great detailed overview of the three types of blockchains? - ?public blockchains (like Bitcoin and Ethereum), federated blockchains (like R3 and EWF), and private blockchains (e.g. platforms like Multichain).
This post by CB Insights highlights 30 industries that blockchain could transform, and the companies leading the disruption.
This TED Talk is the best explanation of why Blockchain is going to change the world (spoiler alert… it's about trust).
4. DECENTRALIZATION Is Potentially The Most Disruptive Force
Blockchains, cryptocurrencies, together with other smart contracts are enabling Decentralization, which is the REALLY disruptive thing. The chart below is widely known in crypto. It's often disparaged as too simplistic to be meaningful, but I find it helpful.
Governments and businesses have largely functioned via centralization. Someone or some organization sits in the middle, making the rules, and taking a toll (either taxes or fees) for providing a function. We can now leverage technology, take out the middleman, and enable highly functional decentralized entities (like bitcoin).
Take life insurance. I believe, in the future, through smart contracts and the blockchain, decentralized structures will provide life insurance, saving buyers of life insurance the $10's of billions of tolls (sales commissions, profits, …) that insurance companies takes for sitting in the middle.
ICOs are funding a growing list of real-world decentralized companies. Augur is building a decentralized prediction market. PROPS is a decentralized economy for digital video. OpenBazaar is a decentralized peer-to-peer marketplace. Aragon is a decentralized provider of tools to enable more efficient decentralized companies.
Decentralization is the lens through which I now look at everything. It's the most important thing I've learned about over the last three months.
It seems to make sense that, all else being equal, the industries most at risk for disruption from decentralization are where the middlemen charge the highest tolls. Below is a list from Forbes of the 10 industries with the highest net margins in 2016:
Even though investment managers are getting disrupted by ETFs and robo -advisors, they're still churning out nice margins. Certainly my own industry (venture capital) is at risk:
But I don't think VCs aren't going away anytime soon, particularly VCs that focus on crypto and invest in ICOs. In addition, ICO investors see name VCs as a positive signal (e.g. Filecoin). So VCs may be diminished, but the good ones will adapt and innovate.
To learn more about decentralization, read Vitalik's "The Meaning of Decentralization" which goes in to the the three different dimensions of decentralization:
5. It's A Bubble….So What
The biggest sign that it's not a bubble, is that almost everyone says it's a bubble. By way of background, I'm a VC and former Wall Street equity analyst, and I think it's a bubble because I see ICOs trading at 50X-100X+ what I think they would be valued at if they were funded by VCs or traded publicly. And history says it's not different this time. Here's a great book on the last 800 years of people saying "it's different" this time to justify lofty valuations.
I say "so what" because I believe in Amara's Law: We tend to overestimate the effect of a technology in the short run and underestimate the effect in the long run. This is part of the reason we get bubbles. We get overexcited about a new technology and we drive up prices beyond any reasonable valuation. Bubble's go on for years. The internet bubble lasted 5+ years.
But the more important part of Amara's law is that we underestimate the effect of a technology in the long run. The internet is more impactful, and a greater wealth creator than anyone imagined. The internet brought us $3 trillion of wealth just in FAMGA. What's the value to be created from crypto, blockchain, and decentralization? Today, the cryptocurrency market cap is around $150 billion. Could that figure go down 78% like the NASDAQ did in the 30 months after it peaked on March 10th, 2000? Sure. And that would be painful. But I'm playing the long game. It was a good strategy with the internet, and it should be a good strategy today with crypto.
6. Governance Is The Biggest Risk To Bitcoin
Regulatory risk is obviously significant on a country-by-country basis, or within the U.S. on a state-by-state basis re all cryptocurrency. We've seen what happened in China. Korea and other countries are also clamping down. In the U.S. the SEC DAO Report was a big step forward for ICOs given the incredible amount of detail and guidance the SEC gave in the report, without it being an enforcement action. Crypto's next on the SEC agenda on October 12th. But at the end of the day, governments are going to do what's in their best interests.
While there is significant regulatory risk, I believe governance is the greatest risk to Bitcoin and other decentralized entities. Bitcoin is essentially governed by exit (h/t Ari Paul). While there's a consensus mechanism, if people don't like the consensus, they have three choices. They can 1)suck it up, 2) they can sell their bitcoins and leave, or 3) they can take the open source code and fork it. Forking comes with both technical risk and community risk. The Segwit2X debate, which could result in a hard fork November 18, is just the latest example of Bitcoin's risk from governance by exit. The Balkanization of Bitcoin won't be a good thing for the community.
7. Don't Hate The Haters. Love The HODL'ers
After Jamie Dimon said "Bitcoin is a fraud", my Twitter stream was filled with Dimon haters. I read what he said, which brought nothing new to the conversation other than his opinion, and moved on. Maybe Dimon doesn't even believe what he's saying. Maybe he's just talking up his own book. I don't know, I don't care, and I won't spend time defending the industry from haters or dissecting the reasons the haters hate (unless they're bringing something new to the conversation).
I want to spend my time preaching to the choir. I want to spend my time learning from, helping, and investing in the believers. As an industry, we have a lot of work ahead of us to achieve the massive world-changing potential of blockchain, cryptocurrency, and decentralization. I'm getting to it.
What an amazing breakdown of where we stand.
I agree with him...we could see things trading 50-100 times higher. There is so much attention being drawn to this space that the investment money will roll in at some point. Look at what he does: he is a VC...that means he dumps larges sums of money into projects. For three months, he lived crypto and blockchain...do you think he is the only one out there? The fact is there are dozens, if not hundreds of VCs just like him out there getting ready to dump a lot of money in this space. That will send things upward.
Being a technologist myself, I loved the part about under estimating things in the long term. This technology will be huge. I estimate it will add 30% to the global GDP (a stupid number but it is all we have to use). One of my next articles is going to be how I believe the blockchain will have $100T on it down the road.
Think about it...everything in the digital form is going on the blockchain and there is more each day that is turning digital.
Eager to read about it, Following you
Make me think of that piece : ~~~ embed:BitcoinMarkets/comments/77twjx/why_the_debate_about_blocksize_is_irrelevent_and/?utm_content=title&utm_medium=hot&utm_source=reddit&utm_name=BitcoinMarkets reddit metadata:fEJpdGNvaW5NYXJrZXRzfGh0dHBzOi8vd3d3LnJlZGRpdC5jb20vci9CaXRjb2luTWFya2V0cy9jb21tZW50cy83N3R3angvd2h5X3RoZV9kZWJhdGVfYWJvdXRfYmxvY2tzaXplX2lzX2lycmVsZXZlbnRfYW5kLz91dG1fY29udGVudD10aXRsZSZ1dG1fbWVkaXVtPWhvdCZ1dG1fc291cmNlPXJlZGRpdCZ1dG1fbmFtZT1CaXRjb2luTWFya2V0c3w= ~~~
Thank you for the follow and the upvote. Great article...the guy speaks like a true financial guys.
Some points I do agree with him on..
-there is a ton of Wall Street money coming in...$1T? I dont know...seems reasonable.
-BTC will get the lion's share of this money, especially initially. No financial broker is going to bother to learn about zCash or Monero or try to convey that to his/her client. It will be you need crypto get bitcoin.
-Even thought the lion's share goes to BTC, other coins will benefit since the entire sector will be uplifted and there will be some really speculative (gambling) money in the $1T
-BTC will not replace fiat currncy nor the financial system...it will be a big part of it (well blockchain will anyway...which I believe BTC will be the leader in that)
There area I disagree with him is the notion that money (the finance guys) will drive everyone...the miners, the developers, etc... He is still looking at this like the typical internet endeavor. The finance people could drive the develop on TCP/IP and HTML since those companies had all the value. While it is being debated, I still feel that in an open de-centralized blockchain, here one can seamlessly move around (hence basically eliminating the silos), there will be less value in the app companies on top of the chain. The value of my steemit account, which is really a steem blockchain account, does not come from Steemit...heck I can use three other interfaces to access the same info...it comes from all the transactions on the blockchains. Hence, where is the financial guys payback for lining up the developers?
Very thought provoking article...
Yeah, I think it's way more likely that the large investors are going to refer to experts, which are most likely going to be bitcoin maximalist or they will learn to become cypherpunk themselves. You don't buy into a new asset class to turn it into the the same old failure. I'm looking at you Segwit2x ... a Corp takeover attempt.
I will give this guy who wrote the article credit...for a financial guy, he at least has a clue about what he is talking about when it comes to the technology. I dont know, maybe he did it in other posts on there, but I noticed he didnt use the term bubble. This guy knows full and well the bitcoin train is just getting started.
BTC wasnt phased by BCH...BTC isnt going to be phased by BCG (or whatever they are calling it) and it wont be phased anything else that tries to fork it.
He is right about the feedback loop....stated a little different, the developers take a blockchain and start creating some cool stuff on it which gets the attention of entrepreneurs who hire other developers to create more cool stuff which starts to get the price, garnering publicity, which attracts the speculators who push the price up higher (and more attention) which draws in more developers.
Same basic premise, the Wall Street guys are going to bring a lot of attention to this space, especially bitcoin.
Decentralization is the future, the crypts have their own way. In a past post, you wrote that they want to control people, throw money out of use.
Now we need to be smart, invest in crypts, and then buy real estate, land, gold and silver. Maybe in the end Bitcoin and other currencies will become the victory of the people, not the rich people. @zer0hedge
Very interesting article
Thanks for sharing
While our friend is struggling to shed the persona of someone he isn't, I suggest you check out the history here:
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